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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

How public policy destroyed northeast N.B.’s export sector

Herb Emery

New Brunswick’s economy and population have grown slowly for a decade because our manufacturing exports stalled. Coming out of our COVID-19 lockdown we can restart our economic engine, but for that to happen New Brunswickers need to rediscover an understanding of industrial competitiveness. And the best way to familiarize ourselves with that concept is to revisit the province’s missteps after 2003, which cost northeast New Brunswick its pulp and paper industry.

It turns out that describing the factors or conditions that allow exporters to profitably produce in New Brunswick are easy to identify. The Canada/United States dollar exchange rate has provided an advantage for exporters who process our natural resources, since their revenue is in U.S. dollars but their costs are in Canadian dollars. But the exchange rate is not controlled by the exporter.

Then there are other things that affect a New Brunswick exporter’s bottom line, including labour and energy costs, taxes and government regulations. All of these influences on exporter competitiveness are affected by government policy. These factors are not unique to New Brunswick. The Atlantica Centre for Energy reported in 2010 that a survey of North American corporate location decision-makers identified the top four site-selection factors for business as labour costs, highway accessibility, energy availability and costs, and corporate tax rates. Moving to an industry like pulp and paper, you would add the cost of, and access to, wood fibre as an additional consideration.

In the early 2000s, with the province’s trade exposed, high wage pulp and paper producers faced both declining global demand for paper products and an appreciating Canadian dollar. The appreciating dollar eroded the competitiveness of Canadian paper producers. In 2005, as mill owners in New Brunswick warned that they may exit the province, Premier Bernard Lord remarked that ‘Businesses make these decisions for business reasons… We have to continue to work at making sure New Brunswick remains competitive.’

In 2003, New Brunswick had 10 pulp and paper mills operating in the province, many of which were part of multinational enterprise operations in the northeast of the province. By 2008, the province lost three of these foreign-owned mills in Dalhousie, Miramichi and Bathurst. The mill owners attributed the closures to a variety of factors, including slowing demand for packaging in North America as manufacturing shifted overseas, inflationary costs, high fuel costs and “the competitive disadvantage of a high dollar.”

It bears noting that mills in Quebec also faced an appreciating dollar and softening demand for paper products, yet its pulp and paper employment did not drop as abruptly as New Brunswick’s. So what was it about New Brunswick that so drastically undermined the competitiveness of provincial pulp and paper producers? Most likely, it was the exceptionally large increases in electricity prices for large industry which took place between 2003 and 2007.

Just as pulp and paper producers confronted a Canadian dollar increasing from around 65 cents per U.S. dollar in 2003 to 94 cents by the end of 2007, rising fuel and debt service costs for NB Power resulted in a dramatic escalation in power prices, particularly for large industry. From 2004 to 2007, power selling prices to large industry increased by 30 per cent in New Brunswick, compared to 17 per cent in Nova Scotia and eight per cent in Quebec. The Atlantica Centre reported in 2010 that by 2009, ‘industrial electricity rates in New Brunswick were well above the median in Canada and the United States and 40%-90% higher than areas that directly compete with New Brunswick firms in the forestry industry.’

Part of the reason for the increase for large industry in New Brunswick was that as of late 2004, power rates for large industry were lower than for residential customers and intermediate-sized industry in the province. By 2007, after several years of rising energy costs, the decision had been made to eliminate this gap and place the burden of the increased costs onto large industry. Pulp and paper mills’ energy costs rose dramatically, yet little relief was to be found in their other costs, which remained resolutely stable.

Why were the mill closures concentrated in the northeast of the province when all mills in the province would have faced the same increase in power costs and inflexible wages? A few factors seem to be at play in the concentration of losses in the northeast of the province. First, we should not be surprised to see that the surviving mills were near both the four-lane Route 2, which connects Nova Scotia and Quebec, and the four-lane Route 1 from Moncton to St. Stephen. On the other hand, most highways in northeast New Brunswick remain two-lane to this day.

Second, unlike the Saint John area, which was developing into a more diversified energy hub in the mid-2000s, northeast lacked a similar capacity for diversification.

And the mills that closed were multinational firms leaving New Brunswick, but not the industry. The remaining mills were “home teams” for the province and somewhat less footloose. While total employment in the industry has not recovered to its peak in the early 2000s, GDP from pulp and paper production has recovered. Further growth from the industry is likely possible if the province chooses to follow Bernard Lord’s 2005 advice to “to continue to work at making sure New Brunswick remains competitive.”

The northeast of the province has never recovered from the loss of large industry after 2003, although the region’s loss has been a big contributor to our province’s excellent record for reducing emissions. With the loss of the Belledune generation facility, the northeast will further contribute to the province’s green record even as it falls further behind the rest of New Brunswick with respect to the infrastructure and assets which would support industrial growth.

So here we are in 2020, following several years of challenges for the province’s exporters to deal with rising electricity, exports, and labour costs These are in addition to environmental and labour regulation changes that have increased the cost of doing business in the province. Our exporters have been supported by a low dollar, but now we are dealing with a pandemic that is altering demand for our manufacturing exports and our capacity to compete for global market share as supply chains re-organize.

Knowing what happened to the northeast of the province more than a decade ago when similar challenges for exporter competitiveness arose, what do you think the government of New Brunswick should do this time? If you aren’t sure, then consider this: For nearly a century prior to 2000, New Brunswick governments had a laser focus on developing low-cost electricity supply as a source of industrial competitiveness. It appears that while the province benefited from the legacy of their success in developing manufacturing exports, we lost our understanding of business competitiveness. We are still paying for that loss to this day.

Herb Emery is a Brunswick News columnist and Vaughan Chair of Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – May 27, 2020

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.